Ontario Court Of Appeal Draws A Clear Line Between Employment Rights And Equity Rights

The Ontario Court of Appeal’s recent decision in Friel v HUB International Limited¹ addresses an issue that frequently arises in executive compensation arrangements: when an employee receives stock options or other equity-based incentives, are disputes about those rights governed by the employee’s employment agreement or by the separate agreements governing the equity-based incentives?

The Court’s answer was clear. Although the employee received the disputed equity rights while employed and became eligible for them because of his employment, the dispute was ultimately about rights arising under the separate agreements governing the equity-based incentives. As a result, the dispute was not governed by the dispute resolution provisions in the employee’s employment agreement. Instead, it had to proceed in the forum specified in the equity documents.

For employers, the decision highlights the importance of ensuring that employment agreements, stock option plans, shareholder agreements, and other incentive compensation documents are drafted consistently. As Friel demonstrates, what may seem like routine drafting can ultimately determine not only the outcome of a dispute, but where that dispute is fought.

Background

Declan Friel was employed by HUB International HKMB Limited, an Ontario insurance brokerage. His employment agreement contained an Ontario governing law clause and required disputes “arising out of or in connection” with the employment agreement to proceed through mediation-arbitration in Ontario.

Approximately two years after he signed his employment agreement and commenced his employment, Mr. Friel was granted options to acquire certain shares of a Delaware-based affiliate of his employer pursuant to an option agreement. The option agreement incorporated an Equity holders Agreement containing a forum selection clause requiring disputes to be resolved in the Delaware Court of Chancery.

After the options vested, Mr. Friel resigned and joined a competitor. Several months later he took steps to exercise his options. A dispute arose over whether the shares Mr. Friel would purchase pursuant to the option would be subject to repurchase at cost by the issuer as a result of Mr. Friel’s “misconduct” (i.e. having resigned to join a competitor). Rather than commencing proceedings in Delaware, Mr. Friel argued that the dispute fell within the arbitration provisions of his Ontario employment agreement.

The key issue before the courts was whether the dispute should proceed under the employment agreement’s Ontario arbitration process, or under the Delaware forum selection clause contained in the equity documents. The application judge concluded that the dispute was governed by the equity documents and therefore belonged in Delaware. Mr. Friel appealed the decision. Of note, Mr. Friel’s employer was not a respondent to either the application or the appeal.

The Court of Appeal’s Decision

The Court of Appeal upheld the application judge’s decision and held that the dispute belonged in Delaware, not in Ontario arbitration. Central to the Court’s reasoning was the language of the option agreement, which expressly stated that the equity awards were not employment compensation, were not a term or condition of employment, and did not form part of the employment agreement. The option agreement also stated that if the optionee ceased to be an employee, the option agreement “shall not be interpreted to form an employment contract or relationship with the Company or any of its Affiliates”.

While the preamble of the option agreement stated that the ability to receive options was “an incentive for the Optionee’s efforts during the Optionee’s Employment with the Company and its Affiliates”, and that the respondents agreed in the application motion that the options were “incentive equity”, reviewing the employment agreement, option agreement, and incorporated Equity holders Agreement together, the Court concluded that the options dispute was not contemplated by, nor sufficiently connected to, the employment agreement. As a result, the employment agreement’s arbitration clause did not govern the dispute. Instead, the Delaware forum selection clause controlled.

The Court of Appeal also rejected the employee’s argument that the Delaware forum selection clause should not be enforced. Mr. Friel argued that it was unfair to require an Ontario employee to pursue his claim in Delaware. The Court found no basis for setting aside the parties’ agreement, noting that there was no evidence that Mr. Friel had been pressured into accepting the clause, or that pursuing the dispute in Delaware would prevent him from obtaining a meaningful remedy.

Employment Considerations for Employers

For employers, Friel demonstrates that courts will not automatically treat every dispute involving an employee as an employment dispute and provides an example of a case where courts will hold an employee to the terms of equity-based incentive agreements as standalone agreements in their own right without filtering them through the employment relationship. Although Mr. Friel received the stock options because of his employment and the dispute arose shortly after his resignation, the Court focused on the agreement that created the rights being claimed. Because those rights arose from the option agreement and Equity holders Agreement, rather than the employment agreement, the dispute was treated differently than a typical employment claim.

This distinction is significant for employers that use equity-based compensation to attract and retain key employees. Stock options and other long-term incentive plans are often viewed by employees as part of their overall compensation package. However, disputes involving those awards may be governed by a different set of rights and obligations than disputes involving compensation, benefits, termination entitlements, or other employment-related claims.

The decision also reinforces the importance of careful drafting. Employers that intend for equity awards to be governed separately from employment agreements should ensure that the relevant documents clearly reflect that intention and consistently describe the nature of the employee’s rights as being separate and apart from the employee’s employment agreement.

Lastly, we note that although the facts of the case involved competing interests between an employer and an employee in circumstances where an employee resigns to work for a competitor, the issue before the court did not raise issues such as the scope of any restrictive covenants contained in the separate agreements governing the equity-based incentives including the Equity holders Agreement or the proper forum for resolving disputes about them.

Corporate and Governance Considerations

The decision is equally relevant for companies that use stock options and other equity incentives as part of their overall strategy. Organizations that operate through multiple corporate entities, particularly multinational organizations and private equity-backed companies, often seek to centralize disputes involving shareholders and equity holders in a single jurisdiction.

In Friel, the Court enforced the Delaware forum selection clause contained in the Equity holders Agreement and required the dispute to proceed in Delaware. In doing so, the Court recognized that the rights associated with the stock options were distinct from the employee’s rights under his Ontario employment agreement.

For companies that offer stock options or other ownership interests, the decision underscores the importance of ensuring that shareholder agreements, option agreements, and related documents operate together and clearly set out participants’ rights and the process for resolving disputes. Doing so can provide greater certainty and reduce the likelihood of disputes over where and how claims should be resolved.

Key Takeaways for Employers

1. Ensure Employment Agreements and Equity Documents Are Consistent: Employers should review employment agreements, stock option plans, shareholder agreements, and other incentive compensation documents together. Inconsistent language can create uncertainty and increase the risk of litigation.
2. Clearly Define the Nature of Equity Awards: If stock options or other equity incentives are intended to create rights separate from the employment relationship, the governing documents should say so expressly
3. Remember That Not Every Dispute Involving an Employee Is an Employment Dispute: Where employees also have shareholder or equity-holder rights, courts will examine the source of those rights. A dispute involving equity interests may be treated differently than a dispute involving employment terms
4. Do Not Treat Dispute Resolution Clauses as Boilerplate: Terms dealing with where disputes will be decided and which laws will apply may seem routine, but they can have a major impact if a dispute arises.
5. Consider Where Equity-Related Disputes Should Be Decided: Companies that operate through multiple entities or across multiple jurisdictions should consider whether a single forum makes sense for resolving disputes involving shareholders or option holders.

Footnote

1. Friel v HUB International Limited, 2026 ONCA 313; Friel v Hub International Limited, 2025 ONSC 7369